6 helpful tips in managing unpaid invoices for small businesses
Unpaid invoices are one of the most common reasons why businesses suffer from cash flow issues. Even a single invoice can disrupt positive cash flow. In a perfect world, business owners shouldn’t have to chase customers for payments. But because of miscommunication or financial issues, most small businesses are used to following up on late invoice payments.
Following up on these invoices is a waste of time and effort. Fortunately, there are ways to effectively handle unpaid invoices. Here are a few tips on how to manage and avoid overdue invoices:
1. Be clear
Do your clients even know when they should pay their bills? If you have several unpaid invoices, it helps to review how you structure your invoices. Does it clearly state the terms of payment – cash on delivery, net 30, etc.? The due date should be hard to miss as well. For instance, use red ink, change the font size, or bold the dates to catch their attention.
2. Send your invoices on time
Let’s face it; small business owners are busy. Juggling several tasks at once can easily distract you from staying on top of your invoices. If you forgot to invoice your clients right away, they will most likely leave it unpaid for a while.
Just like you, your clients may have monthly budgets. If you sent the invoices a month late, there’s a chance they didn’t include payments into their budget. They may not have the means to pay you right away.
Set a reminder to invoice your clients right after you finished the project or delivered the products. QuickBooks, Scoro, and Freshbooks are some of the best invoicing software that can help you manage your invoices.
3. Send a reminder
If you’re busy, chances are, your clients are too. Sending a friendly reminder via email or letter after the due date can be helpful. However, it’s easy to misinterpret a written message, so make sure to keep the tone friendly.
Set a reminder on invoice due dates so you’ll know when to send a payment reminder. Thanks to technology, it’s easy for business owners to automate invoice billing and set reminders using the right software.
4. Charge a penalty fee and offer an early payment discount
Nothing is more motivating than discounts. By giving an early payment discount, your clients will be more inclined to pay earlier than the due date. For example, you can give a 5% discount for invoices paid within 10 days or so.
If the incentives don’t work, penalty fees may be a better motivation. Late-payment fees encourage your clients to pay on time and it gives you extra cash if they do pay late. Win-win!
5. Set up additional payment options
Do you only have one payment option? Do your clients have to go to your store to pay? The goal is to make your payment process as convenient as possible. Some of your customers may prefer online banking or credit cards, while others prefer PayPal or Venmo. Consider different types of payment options for your clients and make sure to make it as convenient as possible.
6. Finance your invoices
When pending invoices start to pile up, it can easily cause a dent in your cash flow. This makes it hard to pay your expenses on time and focus on the expansion of your business. If you have pending invoices and you need cash fast, invoice financing is a great option.
Invoice financing allows you to sell pending invoices to lending companies in exchange for immediate working capital. You’ll get 80% to 90% of the total invoice value upfront and receive the remaining balance after your customers pay, minus a small transaction fee.
You don’t have to wait for weeks or months before you get paid. You’ll also save time tracking down clients and send payment reminders because the lender assumes the responsibility for payment collections.
The bottom line
Rather than managing unpaid invoices, it’s best to avoid them altogether. Do a background check on your clients to make sure they have a great history of on-time payments. Have them sign a contract, keep their records, and if possible, ask for upfront payment.
Your clients prefer a hassle-free payment process. If the payment process is convenient, they’ll most likely pay their invoices on time – even earlier. You should also know when to stop chasing an invoice. Ideally, you shouldn’t let one go, but it’s also not worth the time, effort, and money to track down a $250 invoice.
Most importantly, establish a strong and lasting relationship with your clients. By doing so, they’re less likely to run off with your money.